This is a CU Colorado Springs student blog for the following courses: Intermediate Microeconomics and Austrian Economics.

December 2, 2014

A Grand Masquerade? Regulatory Capture?

By C.W.

Two months ago, much to the chagrin of her coworkers, former FED Bank examiner Carmen
Segarra released audio recordings implying officials from the Federal Reserve
Bank of New York showed leniency in an exchange of assets between Goldman Sachs
and Spanish bank Banco Santander. The deal explained as “legal but shady” by the
recorded FED employee, offers a rare glimpse into FED meetings. The contract
required a “no objection” clause on behalf of the FED, the FED notices the detail
and in their meeting with Goldman Sachs they do not press Goldman Sachs, rather
accept Goldman’s explanation of it “not meaning what it appeared to say.” After
the meeting, the tape records Segarras’ fellow employee speaking, encouraging his
collegues not to “discourage” and “criticize” Goldman Sachs “in order to better
understand the market place (1).” The article by NPR intonates the FED of being
too familiar with the said banking institution and not having the strength to
properly regulate banks. She advocates that the FED promotes a “culture of fear
and servility in dealing with banks (2).” Jake Bernstein, the reporter who
leaked the tapes states:

"These are people who work inside the
banks. They see these people every day, and they need to obtain the information
from these banks, and it's easier to obtain the information if you're friendly
and if you have a good relationship, but sometimes that can slide to deference.”
(1)

A quote form a recent reading of ours, echoes a similar sentiment:

“…but they can be people who importantly enforce the rules of the sport
as they are known at the outset of the match, that is who follow the rule law-
or they can be people who arbitrarily enforce rules against one team but not
the other.” (3)

In the wake of the public criticism, the FED has decided to
launch an internal investigation into whether it is too close to certain banks.
While an internal review will offer little transparency and impartiality, it
does highlight a major concern: is the FED in a state of regulatory capture?
Have they ceased acting for the public good and are they too influenced by
other major banking institutions? Obviously, the problem is a lot more complicated
then what will be discussed here, but the existence of a central bank is a core
argument in Austrian vs. neoclassical economic thought.

The Federal Reserve is
an exceptionally powerful institution; a bank that can literally dictate markets.
By some reports, the Federal Reserve allocated 16 TRILLION dollars to banks
around the world during the 2008 crisis. Do Austrian economists have a point? Is
the Federal Reserve handing out free lunches? Will “printing money from thin
air” have long term repercussions? Why did we not let these banks fail, and
allow more risk adverse banks replace them in the financial niche?

Carmen Segarra was fired from her
job and subsequently sued the FED. She lost.